CFPB Changes Up the Rules on BNPL - What’s That Mean for Credit Unions?

Buy now, pay later has become incredibly popular among consumers, and many lenders and online payments companies have taken notice.

In fact, buy now, pay later has become so prevalent that the Consumer Financial Protection Bureau said in issuing a rule, “13% of Buy Now, Pay Later transactions involved a return or dispute. In 2021, people disputed or returned $1.8 billion in transactions at the five firms surveyed. The failure to provide dispute protections can create chaos for consumers when they return their merchandise or encounter other billing difficulties.”

The CFPB’s rule that BNPL lenders are subject to and need to meet the same requirements as standard credit card issuers. This means that BPNL companies, such as Klarna, Affirm and AfterPay, follow the same guidelines for exchanges, returns, and refunds as companies such as Visa and MasterCard do.

However, it’s a bit different for credit unions offering BNPL services. Our co-founder Sarah Snell Cooke explores this and more with the Equipifi CEO/Founder Bryce Deeney. They also discuss the potential opportunities for credit unions to get in on the BNPL action and synergize with other lending services.

Read the full transcript below:

Disclosure: Transcript is automatically generated

Sarah Cooke 00:02

Welcome everybody. I am Sarah Snell Cooke, and we are here with The Credit Union Connection. I have with me today Bryce Deeney, who's the CEO of Equipifi. Welcome.

Bryce Deeney 00:40

Thanks, Sarah.

Sarah Cooke 00:41

yeah, welcome back, actually, so you've been here before. Equipifi offers buy now, pay later, services that credit unions can take advantage of to offer to their members. And so, we were talking about the CFPB's new rule that, I'm going to say, it generally defines buy now, pay later, as credit card issuers, so just explain, if you will, you're the expert.

Bryce Deeney 01:09

Yeah. Well, what I will say is, to understand the current, really, you kind of have to go back in time. So buy now, pay later for those of you who are kind of understand, like, what's the definition there? It's a consumer loan, an unsecured consumer loan that's tied to a specific purchase. So, you know, back in the day, when I was a kid, we walk into the furniture store, we'd want that couch, and they would say, hey, just fill out this application, you can finance that over time. Technically, that was a variant of buy now, pay later. And I think before that, you didn't have store credit, right? In fact, I remember going to like the local convenience store and getting the Snickers bar, and they would put on credit you paid at the end of the month. Well, buy now, pay later in its current form is an immediate variant of those products that, that preceded it. So, obviously the regulatory bodies in the US hadn't really caught up to the instant, underwriting and instant lending component that is buy now, pay later today. So the CFPB recently put out an interpretive ruling that says, buy now, pay later lenders, so think of the large brands in the US like Klarna and Afirm and Afterpay and PayPal, and there's dozens of others, but those are kind of the four big ones now are subject to these same truth and lending requirements that credit card issuers are, so things such as having periodic statements, things such as understanding a consumer's propensity to repay, making sure that if a consumer returns the item back to the store where they you know, bought this thing, but bought it through the mechanism of buy now, pay later, that the returns and exchanges and refund processes follow the same guidelines that traditional credit products like Visa, MasterCard, American Express already had today. So the short answer is, now third party BNPL providers are essentially offering the same protections from a legal framework as if I swipe to my credit union, you know, Visa Signature company. I have a lot of other thoughts about this, but I'll kind of pause there, and we can, we can keep the conversation going. Yeah,

Sarah Cooke 03:38

yeah. Well, so one of the things that I read about in the or in an explanation of the reg is that 13% of the transactions involved disputes, like you said, with the return, something happened with the return or other disputes, and that was part of the protections they wanted to provide. And so what do you, what are your thoughts on that, what the reg actually is doing for consumers? Let's start with that side.

Bryce Deeney 04:10

sure, um. So yeah, if you, if you break down, like the four or five main points of this interpretive ruling, I do think the one that really has some sticky nature that should help consumers over time, if they prefer to use, buy now, pay later, from those direct to consumer fintechs that I mentioned earlier, it is going to have a forcing function where the Affirms and Afterpays of the world are going to have to have really, really clear return and refund policies that they have to follow, where, prior to this interpretive ruling, they kind of were left to their own devices of how to handle those disputes and returns and refunds. I will say, like I definitely don't, you know, have these types of conversations to defend the direct consumer fintechs. Well, obviously they are a direct consumer brand, right? Just like a credit union is a direct to consumer brand, and it's in their best interest to offer the best products and services available to consumers. That way, they those consumers continue to come back and shop and use their card products and eventually other products that they offer. So I actually don't think it's going to have a huge impact to the consumer experience, but it does offer the same protections, right, that traditional card products do.

Sarah Cooke 05:34
And so how, is this going to affect Equipifi at all?

Bryce Deeney 05:37

No, you know, for those listening who aren't really aware of who we are, we're just the technology provider or the infrastructure that enables existing financial institutions, which we predominantly serve, the credit union community today, to offer BNPL directly to the member base. So just like, you know, Visa offers credit cards and debit card products, EquipiFI is a buy now, pay later technology provider. So our existing clientele today are already regulated financial institutions that offer products like debit cards, credit cards, unsecured signature loans, keylock mortgages, you know, auto loans, etc. So the way that we've built our technology is already inside of the regulatory framework of the regulatory bodies such as the NCUA and the CFPB and other regulatory bodies depending on your institution. So we built it in a way that actually attaches it to the existing debit card the consumer already uses, which has Reg E, like, if there's somebody listening who's a huge partner, you're gonna know what I'm talking about. On the debit card side, consumers have Reg E protection, so you already have protections as far as returns, refunds and disputes. All of our clientele already offer, for example, truth lending disclosures that are kind of flowing through our platform. Consumers already get periodic statements, so there actually is no change for our existing customers once this rule goes into effect, which I think probably the calendar is, maybe in like a month, four to five weeks from now, you were specific to say existing customers. What about going forward? Are those, are those prospective clients going to be affected by it? What I will say is they're not impacted by the regulatory framework. Actually, what this has caused for Equipifi is an influx of demand. We've had a lot of institutions over the last few years as we were building out our company and our CUSO. A lot of institutions who are sitting on the sidelines just because there wasn't clarity from a regulatory perspective on how they should look at buy now, pay later. Should they dip their toes in the space or not? Now that there is some clarity around this, we've actually seen a significant increase in demand of institutions who are saying, hey, now that we have a green light, let's go ahead and start pursuing and offering the storm numbers. Yeah,

Sarah Cooke 08:10

yep. And so I wanted to move on to a little bit broader and you sort of a good segue there, as far as, like, the broader market questions. So in 2024, by the end of the year, buy now, pay later, is expected to grow 12.3% year over year, or $80.77 billion and given the current environment, do you think we're going to hit that? Is demand still there?

Bryce Deeney 08:41

Obviously. Obviously I'm very bullish on buy now, pay later. It's why we founded the company a few years ago. I actually think those numbers are conservative, because those are industry analysts looking at Klarna, Affirm, Afterpay and PayPal, and extrapolating that over the next few years. They are not taking into account that millions of consumers are now able to take advantage of the power of buy now, pay later from their trusted institutions. And we see this already today, our clientele who launch, you know, debit card BNPL see more usage than their members use third parties combined, right? So if you look at a 50,000 member base, they're actually using that credit union's buy now, pay later more than they use PayPal, Affirm, Klarna and Afterpay combined. So these analysts really haven't caught up to what it means if the incumbents, is what they call them, the traditional financial institutions offer this directly as an embedded experience. We see the growth rate significantly outpacing what the analysts are

Sarah Cooke 09:53

saying, and I would think it's more seamless for the consumer too, because they only apply once, right? Because it's attached to the debit card. It's not like you got a, to apply BNPL every time you want to use it.

Bryce Deeney 10:03

Yeah, in fact, Equipifi built this in a way that the consumer doesn't have to apply. Um, so for consumers who you know, let's say they bank with a credit union. Today, they use a credit union debit card or credit card, but they love BNPL, and their credit union doesn't offer it. When they go to sephora.com they see a Klarna button, right? So they apply for Klarna, they get their Klarna loan to get their Sephora goods, and then they go to Lululemons website, and a Lululemon may be part of Affirm, right? And you can kind of go down that decision tree, eventually that consumer now has relationships, and they've applied for, you know, sometimes three, four or five different providers, and they have loans with all these third party providers, and the only way for them to actually manage that financial experience is by logging into all of those apps and then logging into their credit union app to see, do they actually have enough money for that next bi-weekly or monthly payment? So you're 100% correct. Now that the consumer has that experience bolted into their checking account from their digital banking app, from their trusted provider, now they can log in and decide which transactions Lululemon or Sephora or Walmart or Amazon they want to split up over time. And there's no application. There's no process to manage those because it's tied into your DDA that your debit card is already attached to.

Sarah Cooke 11:24

Very cool, yeah, and so, I mean, liquidity is tight right now for credit unions anyway. You know, lending has slowed down intentionally because they've had to tighten underwriting. So how, are credit unions going to be able to keep up with the consumer demand? With these, with the current environment?

Bryce Deeney 11:45

Yeah, I think so. I, this is going to be a little bit along with the question, because talking about like current landscape on lending, liquidity is a very large topic. But if you kind of go through the last few years, we had the stimulus money, that plus cash, the credit unions like, hey, how do we lend against this? But interest rates were low, so they weren't making a high ROA or ROI on the dollars that they're lending out. And then we had the fastest rate hike in modern history. Stimulus money kind of dried up. And then there was, like you said, this liquidity crunch of the deposit to loan ratios at that point. However, you know, so credit unions did tight, tighten their underwriting. And then now you see mortgages and auto loans at a extremely high rates, at least in my lifetime, they're the highest that I've seen as an adult. One of the problems we're seeing now is kind of the pendulum has swung to where credit unions actually aren't able to issue enough loans, because consumers are not actually taking out those large dollar, long term loans. But with high inflation comes high unsecured consumer borrowing, right? So, so we have seen credit card balances tick up. We've seen a significant increase in usage of buy now pay later, because consumers do want to finance, for example, that vacation or that couch or that medical bill, but maybe they're not buying a new home yet. Um, so credit unions actually on their balance sheet, we've seen that pendulum swing where a lot of them are actually looking for profitable short term loans that turn over quickly, because then they are taking on that, you know, seven year, eight year risk on a auto loan, or a 30 year risk on a, on a mortgage, and then they now have a loan product that turns, essentially the entire book turns every six months to where they can make a profit on that and there's high demand for it.

Sarah Cooke 13:46

Mm, hmm, perfect. Yeah. And so you kind of, for all the reasons you were you were explaining at the beginning of what you were saying, as far as consumers, you know, and inflation, and we've seen delinquencies tick up in all different types of loans. How are they performing as far as delinquencies for the BNPLs?

Bryce Deeney 14:08

Yeah, so BNPL today, now, obviously, I'm only talking about EquipiFI data performs 2x better than unsecured consumer credit cards. There's a lot of reasons for that. The first and foremost is we do cash flow underwriting real time. So if you look at a credit card, right when I applied for my credit union's credit card, they ran my FICO, ran my DTI seven years ago, gave me my Visa Signature card, and then, essentially, now they have to just hope that I continue to pay off my bill every month, and they kind of extend that risk out in perpetuity, over time. Well, because of that, when interest rates rise or unemployment rises, or there's a change in the macro environment, delayed businesses are going to ebb and flow right? Buy now, pay later are again on that short term nature of the actual loan type, when you can have a high degree of probability that Bryce has high propensity to repay this particular, that, that means that this particular loan is going to pay, paid off the majority of the time. So having a 30 day plus delinquency, you know, some 140 basis points on a product like this is, performs very, very well, especially in this environment, compared to the other loan products that credit unions saw. Yeah,

Sarah Cooke 15:33
yeah, absolutely. So you've been on here before. I'm going to ask you final thoughts as we wrap this up. What are your, what do you want to share with credit unions?

Bryce Deeney 15:43

I think it's just, it's really fascinating. A few years ago, you know, zero credit units offered a true buy now, pay later product to their member base. We kind of came out of the woodwork in 2021 and said, Hey, like, there's a market here that credit unions are missing out on, you're going to start losing wallet share. But at the time, third party BNPL providers were kind of one trick pony fintechs, right? Which is how most direct to consumer fintechs start like, hey, we will finance this one product. Over the last year, we've seen consumers switching their top of wallet card from their credit union or the, you know, the primary financial institution, to the Affirms of the world, the Affirm debit card, 70,000 consumers are switching to it as their top of wallet card every single month right now. So I think because of that and all the other topics that we discussed today, we've, we've seen a lot of credit unions get into the game. You know, so far this year, we've launched one credit union in about every week, so far. I think that number is going to double or triple next year as more and more credit unions understand, like, Hey, this is a credit product or a credit union, and we should stay relevant for the next generation. Um, last thing I'll just kind of drop in here right now is, because of that demand, we're actually hosting our first Equipifi event at the end of the year. We weren't really sure what, what that was going to entail, but we're like, hey, let's just invite credit unions to Phoenix. And you know when it's not 120 degrees. Now we're realizing we might need a larger space. So like, the opportunity is real. We're so excited to partner with with all these credits unions.

Sarah Cooke 17:33
That's awesome. Well, thank you so much for your time today. Appreciate it,

Bryce Deeney 17:36
And thanks Sarah as always.